Op-Ed Series #1 – Australia’s rental crisis is not going away

19 September 2024, 4:49 am

In this series of short articles, Finwell Group CEO Adam Carmody shares his views on key issues in Australia, such as money and finance.

Our purpose at Finwell Group is to help educate our clients about financial issues and financial planning. The outcome is that you have the data to make informed decisions about your goals in life.

We hope this article on the rental crisis will assist you as an investor and wealth creator.

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First up, let’s start by defining what the rental crisis is.

Essentially, we have seen and will likely continue to see the cost of renting a property increase.

This is disastrous if you are trying to find a place to rent, and it isn’t limited to the big cities, with major regional towns also seeing sharp rises in rental costs.

Underpinning these rental price increases are higher interest rates and inflation. The increasing interest rates make the investment loans more expensive while inflation growth makes the costs of maintaining properties and insurance higher too.

“While Australia’s perilous rental market appears entrenched in a never-ending run of rent rises, we remain optimistic that a tipping point will be reached in 2024,” said Nicola Powell, Domain’s chief of research and economics.

Landlords then pass on these cost increases in the form of higher rent. Whether you agree or disagree with the amount that rents have gone up, that isn’t really the focus of this article.

The facts are that rents have increased by nearly 40% in the last 5 years in Victoria. Compared to Sydney and Brisbane, rents in Victoria are still low, but that hasn’t helped Victorian tenants.

According to SQM Research managing director Louis Christopher, the rental market is in severe shortage and is not expected to materially soften from its crisis for some years to come.

Across Australia, the average rental vacancy rate is 1.3% according to the latest data. This represents only about 40,000 vacant properties across the nation.

When you compare the slow rate of new residence builds at a rate of only around 45,000 a quarter (approximately 180,000 residences per year) against the fact that there were more than 765,000 new arrivals last year driven by the expansionary immigration policies currently being employed by the Labour government – you can see the maths doesn’t add up.

Demand will continue to outstrip supply for some time to come, and interest rates and inflation just make the whole picture even more stark.

We are progressing towards a state of the nation where we have lower effective incomes – due to rising prices and high interest rates, higher living costs, and we will continue to struggle to find places to live as a nation.

Some commentators think the government actions to penalise foreign investors from keeping their properties vacant will have an impact, but the numbers are likely to be low compared to the overall problem.

Analysis of water meter data from tax reform advocacy group Prosper Australia suggests some 5.2 per cent of homes in Melbourne were vacant in 2023, with some 27,000 homes, or 1.5 per cent of stock, were left empty for the entire year.

“We found that over 27,000 homes, or 1.5 per cent of all dwellings, were left entirely empty for the entire year of 2023,” Prosper research and policy director Dr Tim Helm said.

Shane Oliver. Chief Economist at AMP, estimates that Australia’s structural housing shortage has grown to around 200,000 dwellings, which will continue to worsen as population via net overseas migration grows faster than new dwellings can be supplied.

Leith van Onselen is co-founder of MacroBusiness.com.au and Chief Economist at the MB Fund and MB Super. He says:

“The reality of the situation is that the only genuine solution to Australia’s housing shortage and rental crisis is for the federal government to slash net overseas migration.”

My opinion is that the rental crisis is here to stay.

I believe that investment in property should be approached from the view that whilst the costs might be higher, the returns are commensurately higher as well. Meaning that depending on your personal financial situation and goals, property investment can still be an attractive option.

The information in this article is general in nature and does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.